Turkish Yields Decline Six Days in a Row Before Debt Auction

Turkish yields recorded their longest falling streak since December 2010 on expectation that the central bank will not raise borrowing costs. The decline comes a day before the Treasury’s last debt auction in 2011.

The Treasury plans to offer new fixed-rate lira bonds due in December 2013 in a sale tomorrow as part of its plans to borrow 1 billion liras, against a domestic debt service of 1.1 billion liras, according to its website. Yields on the two-year debt retreated 13 basis points, or 0.13 percentage point, to 10.15 percent, falling for a sixth day, to its lowest level since Nov. 11.

“I’d expect to see strong bids and the Treasury to borrow easily in the auction,” Bugra Bilgi, a hedge fund manager at Garanti Asset Management, said in e-mailed comments. “We may see some foreign investor interest” in the auction “despite low borrowing requirement of Treasury,” he said.

The Treasury sold benchmark July 2013 bonds at an average yield of 10.59 percent on Nov. 15, the highest borrowing cost since July 2009, after yields climbed the most since 2008 in October as the central bank more than doubled borrowing costs. Turkish bonds’ returns in U.S. dollar terms are the second-worst year to date among 27 developing nations tracked by JPMorgan Chase & Co.

“The Treasury may borrow more than 1 billion liras to strengthen its cash reserves if the central bank continues to provide more funds at one-week repo auctions and the banks’ cost of funding falls,” Ugur N. Kucuk, a fixed-income strategist at Is Investment Securities in Istanbul, said in e-mailed comments.

Inflation Target

Governor Erdem Basci said on Nov. 30 a tight monetary policy was in place to deal with a “significant” acceleration in inflation in the next two months and sees no need to adjust the interest-rate corridor. Basci has sought to combine inflation-targeting with measures which are designed to absorb shocks emanating from volatile capital flows.

“This erased the fears that the Bank will continue to tighten the liquidity conditions more and eased the pressure on bonds,” Erkin Isik, a fixed-income strategist at Turk Ekonomi Bankasi AS in Istanbul, said in a note to clients dated Dec. 1.

The central bank varies banks’ borrowing costs on a daily basis between the benchmark rate of 5.75 percent and 12.5 percent as part of its policy announced on Oct. 26.

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